articleEconometrics JournalFeb 1, 2011Closed access

Weak and strong cross‐section dependence and estimation of large panels

ACAlexander ChudíkMHM. Hashem PesaranETElisa Tosetti

European Central Bank · University of Cambridge · +2 more institutions

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Abstract

This paper introduces the concepts of time‐specific weak and strong cross‐section dependence, and investigates how these notions are related to the concepts of weak, strong and semi‐strong common factors, frequently used for modelling residual cross‐section correlations in panel data models. It then focuses on the problems of estimating slope coefficients in large panels, where cross‐section units are subject to possibly a large number of unobserved common factors. It is established that the common correlated effects (CCE) estimator introduced by Pesaran remains asymptotically normal under certain conditions on factor loadings of an infinite factor error structure, including cases where methods relying on…

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Topics & keywords

Topics
Keywords
  • Estimator
  • Monte Carlo method
  • Econometrics
  • Factor analysis
  • Residual
  • Mathematics
  • Cross section (physics)
  • Principal component analysis
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